Question 5: Mutually Exclusive Projects
You are considering two mutually exclusive investment projects, X and Y, with initial
outlays and cash inflows as follows:
Year
Project X
Project Y
0
-$1,000
-$1,000
1
$100
$1,000
2
$300
$100
3
$400
$50
4
$700
$50
The projects are equally risky and the cost of capital (or discount rate) for both projects is
12% p.a.
a)
Answer this part of the question without performing any calculations. Suppose you
are to use the internal rate of return (IRR) rule to choose between the two projects. Will
the use of the IRR rule in this case provide an unambiguous and correct decision? Briefly
explain. (5 marks)
b)
Which project should be chosen under the modified IRR (MIRR) rule? Show your
workings. (10 marks)